2 Cash Cows With High Yields and Outstanding Upside

Altagas Ltd. (TSX:ALA) and Inter Pipeline Ltd. (TSX:IPL) are cash cows which give back cash to shareholders. These investments are characterized by high yields and growing dividends. Altagas Altagas’s dividend yield of 7.1% is enticing and supported by a payout ratio of about 88% of cash flows. The energy infrastructure and utility company increased its dividend per share (DPS) at a compound annual growth rate (CAGR) of 8.7% from 2011 to 2016. Altagas’s cash flow generation more than covers its dividend and the capital required for its power and gas maintenance and utility depreciation. Currently, the company earns ~40% of…

To keep reading, enter your email address or login below.

Register by giving us your email below to continue reading all of the content on the site. Also receive a free Email Newsletter from the Motley Fool. (You may unsubscribe any time.)

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls.
I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.

Altagas Ltd. (TSX:ALA) and Inter Pipeline Ltd.(TSX:IPL) are cash cows which give back cash to shareholders. These investments are characterized by high yields and growing dividends.

Altagas

Altagas’s dividend yield of 7.1% is enticing and supported by a payout ratio of about 88% of cash flows. The energy infrastructure and utility company increased its dividend per share (DPS) at a compound annual growth rate (CAGR) of 8.7% from 2011 to 2016.

Altagas’s cash flow generation more than covers its dividend and the capital required for its power and gas maintenance and utility depreciation.

Currently, the company earns ~40% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from generating and storing clean and renewable power; ~35% from distributing gas via its regulated utilities; and ~25% from processing and transporting gas products. The EBITDA generation is split roughly equally between Canada and the U.S.

What has been looming around the stock is the fact that Altagas is working on merging with WGL Holdings, which is a large $8.4 billion transaction with a long way to go before closing by Q2 2018.

However, Altagas isn’t only banking on WGL; it’s also investing in other areas. For example, in May Altagas partnered up with Royal Vopak to build the first propane export terminal on Canada’s west coast.

Royal Vopak is the world’s leading independent tank storage company with a 400-year history. It operates a global network of terminals situated at strategic locations along key trade routes.

Altagas expects to invest $450-500 million in this relatively large project, and partnering with Royal Vopak helps reduce risk.

Inter Pipeline

Inter Pipeline is another cash cow investors should consider. It offers an impressive yield of ~6.4% at about $25.20 per share.

The energy infrastructure company generates more than 50% of its EBITDA from its oil sands transportation business. It also has assets of conventional oil pipelines, bulk liquid storage, and natural gas liquids processing.

Inter Pipeline’s yield is supported by a payout ratio of about 69% of cash flows, and more than 80% of its cash flows are sourced from investment-grade clients. Notably, the company increased its DPS at a CAGR of 10.1% from 2011 to 2016.

Investor takeaway

With sustainable payout ratios and management that seems to be committed to paying increasing dividends, there’s reason to believe that Altagas and Inter Pipeline will continue to hike their dividends.

The cash cows don’t just offer alluring yields of 6.4-7.1%. Their upside potential is just as bright. Thomson Reuters estimates Altagas and Inter Pipeline shares have upside potential of 19% and 22%, respectively, in the next 12 months.

The Motley Fool Canada's top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium "buy report" on a dividend giant he thinks everyone should own. Not only that - but he's created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up - and how you can avoid them.

For this limited time only, we're not only taking 57% off Dividend Investor Canada, but we're offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.